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Unique Fabricating, Inc. Speculative Buy

John Nobile

UFAB $2.87 — (NYSE MKT) November 25, 2019

2017A 2018A 2019E 2020E

Revenues (millions) $175.3 $174.9 $154.9 $163.0

Earnings (loss) per share* $0.66 $0.37 $(0.88) $0.49

52-Week range $6.68 – $2.27 Fiscal year ends: December

Common shares out as of 11/7/19 9.8 million Revenue per share (TTM) $15.98

Approximate float 7.2 million Price/Sales (TTM) 0.2X

Market capitalization $28 million Price/Sales (FY2020)E 0.2X

Tangible book value/share $0.48 Price/Earnings (TTM) NMF

Price/tangible book value 6.0X Price/Earnings (FY2020)E 5.9X

*2019 includes an estimated $(0.69) per share restructuring/impairment charge. 2020 includes an estimated $(0.09) per share restructuring charge.

Headquartered in Auburn Hills, MI, Unique Fabricating (UFAB) is engaged in the engineering and manufacture of multi-material

foam, rubber, and plastic components. These components are utilized for reducing noise, vibration and harshness, acoustical

management, water and air sealing, decorative and other functional applications.

Key investment considerations:

Reiterating Speculative Buy rating and increasing twelve-month price target to $4.50 per share from $4.00 based

on our increased 2020 EPS forecast.

In 2019, UFAB’s sales are likely to be adversely impacted by the loss of automotive business due to the end of life

on certain vehicle platforms, declines in high content vehicle platforms, and the loss of business from two of the

company’s major industrial customers.

Automotive programs launched in June 2019 (approximately $10 million on an annual basis) and a return to

normal production levels in high content vehicle programs should support sales growth in 2020. The closing of

UFAB’S Evansville, Indiana facility in September 2019, the Bryan, Ohio facility closing planned for January

2020, along with further cost reduction measures, should result in earnings growth in 2020.

We estimate the company should pay down approximately $16.4 million in debt over the two years to 2020.

For FY19, we project an 11.4% decline in revenue to $154.9 million and a loss of $(0.88) per share. We previously

forecast a loss of $(0.92) per share on revenue of $157.9 million.

For FY20, we project a 5.2% increase in revenue to $163 million and net income of $0.49 per share, virtually

unchanged from our previous projections. Excluding restructuring charges of $1.2 million, we project EPS of

$0.58. The improvement in net income is primarily due to higher gross margins and lower operating expense than

previously anticipated.

UFAB reported (11/7/19) a 3Q19 loss of $(0.13) per share on an 8.3% decrease in sales to $38.6 million. EPS in

3Q18 was $0.06. Excluding impairment/restructuring expenses, we estimate the adjusted net loss was $(0.05) per

share versus EPS of $0.08 in 3Q18. We projected revenue of $39.5 million and a loss of $(0.08) per share.

*Please view our disclosures on pages 14 - 16.

Unique Fabricating, Inc.

Taglich Brothers, Inc.

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Recommendation and Valuation

Reiterating Speculative Buy rating on Unique Fabricating, Inc. and increasing twelve-month price target to

$4.50 per share from $4.00 based on our increased 2020 EPS forecast.

The company’s product sales and programs are highly correlated with new vehicle production in North America.

According to LMC Automotive, the level of automobile production in North America is projected to decline 2%

in 2019 and increase slightly (less than 1%) in 2020. While lackluster production volumes are projected into

2020, the trend of reducing a vehicle’s weight and increasing passenger comfort has typically led to growth

greater than vehicle production rates. However, UFAB’s sales in 2019 are likely to be adversely impacted by the

loss of automotive business due to the end of life on certain vehicle platforms, declines in high content vehicle

platforms, and the loss of business from two of the company’s major industrial customers.

Automotive programs that launched in June 2019 (approximately $10 million on an annual basis) and a return to




UFAB trades at a 2020 multiple of 6.1X earnings based on our forecast of $0.49 per share (including an estimated

$(0.09) per share restructuring charge). The company’s peers trade at a projected 2020 earnings multiple of 18X

(see chart below). We believe UFAB’S relative valuation should improve as earnings growth resumes.

Company Symbol Price Market Cap $M Trailing P/E 2020 P/E 2020 EPS Growth

Gentherm THRM 40.91 1,336 18.6 16.8 18.4%

Fox Factory Holding FOXF 62.41 2,404 23.6 21.3 9.3%

Standard Motor Products SMP 50.66 1,138 16.7 14.6 13.4%

Modine Manufacturing MOD 6.72 341 5.3 6.1 35.4%

Motorcar Parts of America MPAA 18.86 358 10.8 8.6 19.6%

Superior Industries International SUP 2.83 71 NMF NMF NMF

Tower International TOWR 31 641 12.4 NMF NMF

Stoneridge SRI 28.72 786 17.5 16.9 11.8%

Horizon Global HZN 3.08 78 NMF NMF NMF

Strattec Security STRT 23.07 88 NMF NMF NMF

Peer Average 15.0 14.0 18.0%

Unique Fabricating UFAB 2.87 28 NMF 6.1 155.7%

Source: Taglich Brothers estimates, Thomson Reuters

Investors could accord UFAB a multiple approaching that of its peers based on the company’s 2020 EPS growth

forecast (excludes restructuring/impairment expenses) compared to its peers. We applied a multiple of 9X

(unchanged) to our FY20 EPS projection of $0.58 (excludes restructuring charge), discounted to account for

execution risk, to obtain a year-ahead value of approximately $4.50 per share.

Doug Cain Appointed CEO

On September 17, 2019, Unique Fabricating announced the appointment of Doug Cain as its new President and

CEO. Cain began work September 30, 2019.

Mr. Cain has more than 30 years of leadership and operational experience in high volume production

environments. Over the last 12 years, he served in a series of positions with increasing responsibility for the

Mubea Group, a developer and manufacturer of automotive suspension, powertrain, and body components with

features that reduce vehicle weights, improve performance, and help protect the environment by lowering CO2

emissions. He served as CEO of Mubea North America where he was responsible for the activities of 13 sites in

the US and Mexico, including manufacturing, supply chain, sales, and engineering.



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Resignation of CFO

On September 30, 2019, Unique Fabricating announced that Tom Tekiele, CFO, tendered his resignation. Tekiele

continued to serve the company until October 11, 2019 to facilitate a smooth transition.

The board of directors of Unique Fabricating has engaged an executive search firm to lead the process of

identifying a permanent replacement. In the interim, Doug Cain, the company's new CEO and a seasoned

financial executive and holder of an active CPA license, will fill the role on a temporary basis.

Restructurings

Bryan, Ohio - In November 2019, UFAB made the decision to close its manufacturing facility in Bryan, Ohio and

expects to cease operations at the Bryan facility by the end of January 2020. The company will move existing

Bryan production to its manufacturing facilities in Queretaro, Mexico and LaFayette, GA and expects to incur

one-time severance costs as a result of this plant closure of approximately $0.5 million during 4Q19. Other costs

incurred associated with this plant closure will be approximately $0.8 million during 1Q20.

Evansville, Indiana - In July 2019, UFAB made the decision to close its manufacturing facility in Evansville,

Indiana and expects to cease operations at the facility by the end of December 2019. The company will move

existing Evansville production to its manufacturing facilities in LaFayette, GA, Auburn Hills, MI, and Louisville,

KY and incurred one-time severance costs as a result of this plant closure of $331,000 in both the 13 and 39

weeks ended September 29, 2019. Other costs incurred associated with this plant closure were $518,000 in both

the 13 and 39 weeks ended September 29, 2019 and were recorded as a restructuring expense.

UFAB will incur lease payments for the remaining term of an existing warehouse lease of $1.2 million which will

be accrued upon the facility’s closing in 4Q19. UFAB is actively pursuing a sublease of the facility.

Business

Headquartered in Auburn Hills, MI, Unique Fabricating (UFAB) is engaged in the engineering and manufacture

of multi-material foam, rubber, and plastic components. These components are utilized to reduce noise, vibration

and harshness, acoustical management, water and air sealing, decorative and other functional applications.

UFAB’s products are sold mainly to the North American automotive industry (approximately 85% of total sales

in 2018) and are used in industrial applications such as appliances, water heaters, and heating, ventilation, and air

conditioning (HVAC) systems (approximately 10% of total sales in 2018).

Unique’s primary products are identified by their manufacturing processes, die cut products,

thermoformed/compression molded products (includes reaction injection molding), and fusion molded products.

Die cut products are utilized in applications such as air and water sealing, insulation, NVH (noise, vibration, and

harshness) performance and BSR (buzz, squeak, rattle) conditions. Thermoformed and compression molded

products include HVAC air ducts, door water shields, evaporator liners, console bin mats and fender insulators,

among others. Fusion molded products include exterior mirror seals, cowl-to-hood seals, cowl-to-fender seals,

and other NVH management and sealing applications like fillers, spacers and gaskets.



4

Pictured below are UFAB’s products used by automotive customers.

Source: Unique Fabricating Investor Presentation

Industry

UFAB engineers and manufactures multi-material foam, rubber, and plastic components.

Urethane Foam Products Manufacturing

Products made with this type of foam are used to insulate objects, reduce shock in packaging, seat cushioning,

carpet cushioning, car interiors, fluid filtration systems, and anti-noise and vibration systems.

The Urethane Foam Manufacturing industry has expanded annually by 2% reaching $11.6 billion in 2017 from

2013. IBISWorld projects average annual revenue growth of 0.9% to $12.1 billion in 2024 from 2017. With

11.9% of the total market, this would equate to a $1.4 billion market for automotive and automotive parts

manufacturers by 2024 assuming the current percentages hold steady.

Improving economic conditions have sustained increased demand from major downstream markets. The state of

the US automotive industry, including domestic production volumes, affects demand for foam products. The

automotive industry uses polyurethane foam in car seats and insulation applications with demand directly

correlated to automobile production levels. When more vehicles are manufactured, more foam products will be

purchased by the automotive industry for inputs into their vehicles and their components. A greater focus on fuel

efficiency will result in more prevalent use of foam in automobile production, given its light weight. LMC

Automotive projects the level of automobile production in North America to increase modestly through 2022 to

approximately 17.5 million annually from 16.9 million in 2018.

Rubber Products Manufacturing

The rubber products manufacturing industry is projected to have generated sales of approximately $20.6 billion in

2018 (according to IBISWorld) with 23.9% or $4.9 billion coming from the automotive segment. IBISWorld

projects overall industry revenue growth at an annualized rate of 1.3% reaching $22.2 billion in 2024. Driving

growth will be increased demand for automobiles.



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15.8

16

16.2

16.4

16.6

16.8

17

17.2

17.4

17.6

17.8

18

2016 2017 2018 2019 2020 2021 2022

North American Vehicle Production (millions)

Source: LMC Automotive

Since 2012, revenue derived from automotive rubber parts has steadily increased. Growing demand from

automobile manufacturers has been driven primarily by a strengthening economy and strong demand for lighter,

more fuel-efficient cars, as well as increased demand for SUVs and light trucks.

Automotive rubber products account for the largest segment of the industry's products, and demand for rubber

products associated with automobile and other manufactured goods will increase as manufacturing activity gains

momentum.

Plastic Products Manufacturing

IBISWorld projects the 2019 plastic products manufacturing industry to generate approximately $104.5 billion in

sales with 24.1% or $25.2 billion coming from automobile manufacturers that use plastic in vehicle interiors and

in some engine components. The overall industry is projected to grow at an annualized rate of 0.3% to $106.2

billion in 2024. Driving growth should be demand from downstream markets that includes the car and

automobile manufacturing industry, one of the largest markets for plastic product manufacturers.

Federal regulations requiring cars to have an average fuel economy of 54.5 miles per gallon by 2025 could boost

automotive manufacturing moving forward. A simple way for car manufacturers to increase fuel efficiency is to

produce lighter cars by using plastic materials instead of steel.

End Markets

Automotive

The automotive parts industry provides components, systems, subsystems and modules to OEMs for the

manufacture of new vehicles. Within the automotive parts industry, North America is UFAB’s core market.

Demand for automotive parts in the OEM market is generally a function of the number of new vehicles produced.

Although OEM demand is tied to actual vehicle production, participants in the automotive parts industry also

have the opportunity to grow through increasing product content per vehicle. We believe that the current trend of

increasing fuel efficiency and lowering vehicle weight should help drive increased usage of parts produced by

UFAB.

The evolution of materials utilized in

vehicles is moving away from conventional

steel and is expected to be increasingly

replaced by lighter weight materials such as

plastics and foam materials.

North American production is projected to

decrease to 16.6 million vehicles in 2019

from its plateau of approximately 17.8

million vehicles in 2016. Projections are for

North American vehicle production to begin

growing in 2020, reaching 17.4 million

vehicles by 2022 (see chart at right).

Industrial (Appliance/Water Heater/ HVAC)

Demand for the company’s products in industrial applications is largely driven by the health of the construction

industry. IBISWorld projects the value of private nonresidential construction to grow from approximately $600

billion in 2018 to approximately $725 billion in 2024. The value of residential construction is projected to remain

at approximately $620 billion from 2018 through 2024 (see chart at top right on next page). Continued growth in

the nonresidential construction market should bode well for sales of the company’s products to the appliance,

HVAC, and water heater industries. However, the loss of a major customer in this segment should constrain the

company’s growth in our forecast horizon.



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9/29/19A 9/30/18A

Sales 116,906 135,099

Cost of sales 93,219 104,306

Gross profit 23,687 30,793

Selling, general, and administrative 21,234 22,572

Restructuring / impairment expenses 8,576 1,156

Operating income (6,123) 7,065

Other income (expense) 29 (43)

Interest expense (3,580) (2,433)

Income before income taxes (9,674) 4,589

Income tax (benefit) (598) 699

Net income (9,076) 3,890

EPS (0.93) 0.39

Shares Outstanding 9,779 9,916

Margin Analysis

Gross margin 20.3% 22.8%

SG&A 18.2% 16.7%

Operating margin (5.2)% 5.2%

Tax rate 6.2% 15.2%

Net margin (7.8)% 2.9%

Year / Year Growth

Total Revenues (13.5)%

Net Income NMF

EPS NMF

Source: Company filings

9 Months Ended

The US heating, ventilation and air conditioning

(HVAC) industry is forecast to show modest

growth through 2024, driven mostly by

nonresidential growth. IBISWorld projects

industry revenue to increase at an average annual

rate of 1% to reach approximately $49.5 billion in

the five years to 2024.

Unique estimates the market for its core business

for multi-material foam, rubber and plastic

components utilized for noise, vibration and

harshness (NVH) reduction, air and water sealing, and functional and decorative applications to be approximately

$600 million in North America.

3Q and Nine-month 2019 Financial Results

3Q19 – The net loss was $1.3 million or $(0.13) per share on an 8.3% decrease in revenue to $38.5 million. Net

income in 3Q18 was $627,000 or $0.06 per share. The net loss for 3Q19 included $991,000 of restructuring

expenses. The net loss for 3Q18 included $176,000 of restructuring expenses. Excluding these items, we

estimate the adjusted net loss was $(0.05) per share versus EPS of $0.08 per share in 3Q18. We projected revenue

of $39.5 million and a net loss of $815,000 or $(0.08) per share.

The decrease in revenue was primarily due to the loss of business associated with the end of life on certain vehicle

platforms, the loss of business associated with plant closures, and the adverse impact the UAW strike had at a

certain OEM.

Gross profit decreased to $7.2 million from $8.5 million with

gross margins decreasing to 18.6% from 20.3%. The

decrease in gross margins was primarily due to a $1.7

million increase in inventory allowance, higher material and

labor costs, and lower manufacturing overhead coverage.

SG&A expenses decreased to $6.5 million from $7.2 million

due primarily to headcount reductions. Operating expense

margin (excluding restructuring charges) decreased to 17%

from 17.2%. The operating loss was $354,000 versus

operating income of $1.1 million in the year ago period.

Interest expense increased to $1.1 million from $837,000 due

primarily to higher interest rates. The company received a

$252,000 income tax benefit compared to a $321,000 benefit

in the year ago period.

Nine-months 2019 – The net loss was $9.1 million or $(0.93)

per share on a 13.5% decrease in revenue to $116.9 million.

Net income in the first nine months of 2018 was $3.9 million

or $0.39 per share. The net loss for 2019 included a charge

of $6.8 million for the impairment of goodwill and $1.8

million of restructuring expenses versus $1.2 million of

restructuring charges in 2018. Excluding these items, we

estimate the adjusted net loss was $2.7 million or $(0.28) per

share in 2019 versus adjusted net income of $4.7 million or

$0.48 per share in 2018.



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The decrease in revenue was primarily due to a 1.3% decrease in North American vehicle production, the loss of

business due to end of life on certain vehicle platforms, the loss of business associated with plant closures, and the

adverse impact the UAW strike had at a certain OEM.

Gross profit decreased to $23.7 million from $30.8 million with gross margins decreasing to 20.3% from 22.8%.

The decrease in gross margins was primarily due to a $1.7 million increase in inventory allowance, higher

material costs, and lower manufacturing overhead coverage. SG&A expenses decreased 5.9% to $21.2 million

from $22.6 million. Operating expense margin (excluding restructuring and impairment charges) increased to

18.2% from 16.7%. The operating loss was $6.1 million versus operating income of $7.1 million in the year ago

period. Interest expense increased to $3.6 million from $2.4 million due primarily to an unfavorable mark-to-

market on interest rate swaps. The company received a $598,000 income tax benefit compared to 699,000 income

tax expense in the year ago period.

Liquidity - As of September 29, 2019, the company had $1.5 million cash, a current ratio of 2.4 versus 1.4 for the

car parts industry, $50.8 million of debt (of which $2.9 million is current) for a debt/equity ratio of 1.3X versus

0.6X for the industry, and approximately 36% of assets are covered by equity.

In the first nine months of 2019, cash provided by operations was approximately $6.9 million consisting of cash

earnings of $4.7 million and a $2.2 million decrease in working capital. The decrease in working capital was

primarily due to a reduction in receivables. Cash used in investing activities consisted primarily of $2.1 million

of capital expenditures. Cash used in financing of $4.7 million consisted primarily of a net decrease in debt.

Cash increased by $117,000 to $1.5 million at September 29, 2019.

The company has a $62 million credit agreement with Citizens Bank, NA. The credit agreement consists of a

revolving line of credit of up to $30 million, term loans totaling $26 million, and a two year $5 million line of

credit dedicated to capital expenditures. The revolver and term loans mature on November 7, 2023 and bear

interest at the greater of the prime rate or the federal funds rate plus a margin ranging from 1.75% to 3.25%, or

LIBOR plus a margin ranging from 2.75% to 4.25%, based on senior leverage ratio thresholds measured

quarterly. The effective interest rate as of September 29, 2019 was approximately 6.4%.

On March 31, 2019, UFAB was not in compliance with the total leverage ratio loan covenant which resulted in

the elimination of common stock dividends. On July 16, 2019, the company entered into an amended agreement

with Citizens Bank which provided a permanent waiver of UFAB’S non-compliance with the total leverage ratio

financial covenant. As of September 29, 2019, the company was compliant with the covenants set forth in the

waiver and amended agreement. UFAB does not anticipate the payment of dividends in 2019.

Economic Outlook

As Unique’s customers are principally engaged in the North American automotive industry (approximately 85%

of FY18 sales), the economic outlook for this region should have a direct influence on its sales.

In October 2019, the International Monetary Fund (IMF) lowered its global economic growth estimates to 3% for

2019 and 3.4% for 2020, down from its July 2019 estimates of 3.2% for 2019 and 3.5% for 2020. The IMF said

that after slowing sharply in the last three quarters of 2018, the pace of global economic activity remains weak.

Momentum in manufacturing activity has weakened substantially to levels not seen since the global financial

crisis.

The IMF lowered its economic growth estimate for the US to 2.4% for 2019 but raised it to 2.1% for 2020. In

July 2019, the IMF projected US growth of 2.6% for 2019 and 1.9% for 2020. The IMF said that trade tensions

have resulted in tariff increases between the US and China and have hurt business sentiment and confidence

globally. While financial market sentiment has been undermined by these developments, a shift toward increased

monetary policy accommodation in the US has been a counterbalancing force.



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The advance estimate of US GDP growth (released on October 30, 2019) showed the US economy grew at an

annual rate of 1.9% in 3Q19, down from 2% in 2Q19. The 3Q19 US GDP growth estimate primarily reflects

increases in consumer and government spending, housing investment, and exports, while business and inventory

investment decreased.

Projections

The company’s product sales and programs are highly correlated with new vehicle production in North America.

According to LMC Automotive, the level of automobile production in North America is projected to decline 2%

in 2019 and increase slightly (less than 1%) in 2020. While lackluster production volumes are projected into

2020, the trend of reducing a vehicle’s weight and increasing passenger comfort has typically led to growth

greater than vehicle production rates. However, UFAB’s sales in 2019 are likely to be adversely impacted by the

loss of automotive business due to the end of life on certain vehicle platforms, declines in high content vehicle

platforms, and the loss of business from two of the company’s major industrial customers.

Automotive programs that launched in June 2019 (approximately $10 million on an annual basis) and a return to




FY19 - We project an 11.4% decline in revenue to $154.9 million (prior was $157.9 million) and a net loss of $8.6

million or $(0.88) per share. We previously forecast a net loss of $9 million or $(0.92) per share. The

improvement reflects higher gross margins and lower SG&A expenses than previously anticipated. Excluding

$9.1 million of restructuring/impairment expenses, we estimate a FY19 net loss of $(0.19) per share.

We project gross profit of $32.4 million, down from $39.3 million, as gross margins contract to 20.9% from

22.5% on reduced overhead coverage, offset in part by a full year’s benefit from 2018 plant consolidations.

SG&A expenses should decrease to $27.7 million from $29.8 million as the company implements cost reduction

measures. SG&A margins should increase to 17.9% from 17%.

We project interest expense increasing to $4.7 million from $3.8 million due to higher interest expense related to

unfavorable mark-to-market valuations on interest rate swaps. We project a tax benefit of $445,000.

We project UFAB will generate $9.2 million cash from operations on $5.1 million cash earnings and a $4.1

million decrease in working capital. The decrease in working capital should come primarily from a reduction in

receivables and inventory. Cash from operations should cover our projected capital expenditures, repayment of

debt, and 1Q19 dividend payment, increasing cash by $112,000 to $1.5 million at December 31, 2019.

FY20 - We project a 5.2% increase in revenue to $163 million and net income of $4.8 million or $0.49 per share,

virtually unchanged from our previous projections. Excluding restructuring charges of $1.2 million, we project

net income of $5.7 million or $0.58 per share. The improvement in net income reflects higher gross margins and

lower operating expense than previously anticipated.

We project gross profit increasing 18.8% to $38.5 million due primarily to gross margins increasing to 23.6%

from 20.9% on greater overhead coverage and a full year of cost savings from the closing of UFAB’S Evansville,

Indiana facility in September 2019, and the Bryan, Ohio facility closing planned for January 2020.

SG&A expenses should decrease to $26.8 million from $27.7 million due primarily to a full year’s benefit from

the company’s 2019 cost reduction efforts. SG&A margins should decrease to 16.4% from 17.9%.

We project interest expense decreasing to $4 million from $4.7 million due to lower debt balances. Our tax rate

estimate is 26%.



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We project UFAB will generate $10.3 million cash from operations on $11.8 million cash earnings and a $1.5

million increase in working capital. The increase in working capital should come primarily from an increase in

receivables. Cash from operations is unlikely to cover our projected capital expenditures and repayment of debt,

decreasing cash by $794,000 to $727,000 at December 31, 2020.

Risks

In our view, these are the principal risks underlying the stock.

Substantial debt level – As of September 29, 2019, UFAB had approximately $50.8 million of debt outstanding.

If the company were to default on paying its debt or fail to comply with the covenants, its lenders could take

action that could lead to stockholders losing their investment.

Major customers may exert significant influence - The vehicle component supply industry is highly fragmented

and serves a limited number of large OEMs that have a significant amount of leverage over their suppliers. The

company’s contracts with major OEM and Tier 1 customers frequently provide for annual productivity cost

reductions which UFAB has been able to offset through product design changes, increased productivity and

similar programs with its suppliers. If UFAB is unable to generate sufficient production cost savings to offset

price reductions, its gross margins and profitability would be adversely affected.

Dependency on a few major customers – UFAB’s three largest customers accounted for approximately 19.6% of

net sales in 2018. The loss or insolvency of any of the company’s major customers would adversely affect future

results.

Competition – The vehicle component supply industry is highly competitive. UFAB’S products primarily

compete on the basis of price, breadth of product offerings, product quality, technical expertise and development

capability, product delivery and product service. Increased competition may lead to price reductions resulting in

reduced gross margins and loss of market share.

Exchange rate risks – UFAB has two manufacturing facilities in Mexico and one in Canada. Because a portion of

the company’s manufacturing costs are incurred in Mexican pesos and Canadian dollars, fluctuations in the US

dollar/Mexican peso, and US dollar/Canadian dollar exchange rates, may have a material effect on profitability,

cash flows, and financial position.

Cyclical nature of business - The demand for the company’s products is largely dependent on North American

production of automobiles. UFAB’s business is cyclical in nature as new vehicle demand is dependent on, among

other things, consumer spending, which is closely tied to the overall strength of the economy. A weakening

economy would likely lead to declines in vehicle production and adversely impact the company’s financial

condition.

Potential impact of tariffs – The current US administration has taken steps to apply or consider applying tariffs on

automobiles, parts, and other products and materials which could have the potential to disrupt existing supply

chains and impose additional costs on UFAB’s business.

Liquidity risk - Shares of Unique Fabricating have risks common to those of the microcap segment of the market.

Often these risks cause microcap stocks to trade at discounts to their peers. The most common of these risks is

liquidity risk, which is typically caused by small trading floats and very low trading volume and can lead to large

spreads and high volatility in stock price. There are 7.2 million shares in the float and the average daily volume is

approximately 7,000 shares.

Miscellaneous risk - The company's ability to maintain its dividend and its financial results and equity values are

subject to other risks and uncertainties including competition, operations, financial markets, regulatory risk,

and/or other events. These risks may cause actual results to differ from expected results.



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Consolidated Balance Sheets

(in thousands $)

FY16A FY17A FY18A 9/19A FY19E FY20E

Cash 706 1,431 1,410 1,527 1,522 727

Accounts receivable 26,888 27,204 30,831 27,853 27,305 28,732

Inventory 16,731 16,330 16,285 14,532 14,712 14,953

Prepaid expenses and other 2,870 4,608 3,495 4,012 4,012 4,012

Total current assets 47,195 49,573 52,021 47,924 47,551 48,424

Property, plant and equipment 21,198 22,975 25,078 24,991 24,300 23,934

Goodwill 28,871 28,871 28,871 22,111 22,111 22,111

Intangible assets 23,759 19,636 15,568 12,598 11,623 7,709

Other assets 1,514 1,750 1,749 2,024 2,024 2,024

Total assets 122,537 122,805 123,287 109,648 107,609 104,202

Accounts payable 13,452 11,708 11,465 12,805 12,588 12,794

Current portion of long-term debt 2,405 3,800 3,350 2,947 2,947 2,947

Income taxes payable 611 349 41 - - -

Accrued compensation 2,734 2,841 2,848 2,330 2,330 2,330

Other accrued liabilites 1,066 1,027 1,432 1,732 1,732 1,732

Other liabilites 169 - - - - -

Total current liabilities 20,437 19,725 19,136 19,814 19,597 19,803

Long-term debt 28,029 27,289 34,668 33,432 32,277 28,317

Line of credit 20,176 22,476 17,905 14,454 13,271 8,601

Other liabilities 3,836 2,433 2,690 2,508 2,508 2,508

Total liabilities 72,478 71,923 74,399 70,208 67,653 59,229

Total stockholders' equity 50,059 50,882 48,888 39,440 39,955 44,972

Total liabilities & stockholders' equity 122,537 122,805 123,287 109,648 107,609 104,202

Source: Company filings and Taglich Brothers' estimates



11

Income Statements for the Fiscal Years Ended

(in thousands $)

FY16A 2017A 2018A 2019E 2020E

Sales 170,463 175,288 174,910 154,906 163,000

Cost of sales 130,919 135,234 135,575 122,479 124,485

Gross profit 39,544 40,054 39,335 32,426 38,515

Selling, general, and administrative 27,524 29,767 29,781 27,735 26,800

Restructuring / impairment expenses 35 - 1,156 9,075 1,200

Operating income 11,985 10,287 8,398 (4,383) 10,515

Other income (expense) 92 78 (59) 29 -

Interest expense (2,135) (2,745) (3,778) (4,730) (4,000)

Income before income taxes 9,942 7,620 4,561 (9,084) 6,515

Income tax (benefit) 3,258 1,133 862 (445) 1,694

Net income 6,684 6,487 3,699 (8,640) 4,821

EPS 0.68 0.66 0.37 (0.88) 0.49

Shares Outstanding 9,896 9,899 9,909 9,779 9,780

Margin Analysis

Gross margin 23.2% 22.9% 22.5% 20.9% 23.6%

SG&A 16.1% 17.0% 17.0% 17.9% 16.4%

Operating margin 7.0% 5.9% 4.8% (2.8)% 6.5%

Tax rate 32.8% 14.9% 18.9% 4.9% 26.0%

Net margin 3.9% 3.7% 2.1% (5.6)% 3.0%

Year / Year Growth

Total Revenues 18.9% 2.8% (0.2)% (11.4)% 5.2%




12

3/18A 6/18A 9/18A 12/18A 2018A 3/19A 6/19A 9/19A 12/19E 2019E 3/20E 6/20E 9/20E 12/20E 2020E

Sales 47,304 45,742 42,052 39,812 174,910 39,467 38,889 38,550 38,000 154,906 40,000 40,500 41,000 41,500 163,000

Cost of sales 36,224 34,553 33,528 31,270 135,575 31,167 30,677 31,375 29,260 122,479 30,700 30,983 31,263 31,540 124,485

Gross profit 11,080 11,189 8,524 8,542 39,335 8,300 8,212 7,174 8,740 32,426 9,300 9,518 9,738 9,960 38,515

Selling, general, and administrative 7,967 7,379 7,226 7,209 29,781 7,273 7,424 6,538 6,500 27,735 6,700 6,700 6,700 6,700 26,800

Restructuring / impairment expenses 442 538 176 - 1,156 90 7,494 991 500 9,075 1,200 - - - 1,200

Operating income 2,671 3,272 1,122 1,333 8,398 937 (6,706) (354) 1,740 (4,383) 1,400 2,818 3,038 3,260 10,515

Other income (expense) (36) (28) 21 (16) (59) 17 25 (13) - 29 - - - - -

Interest expense (736) (861) (837) (1,344) (3,778) (1,100) (1,331) (1,149) (1,150) (4,730) (1,030) (1,010) (990) (970) (4,000)

Income before income taxes 1,899 2,383 306 (27) 4,561 (146) (8,012) (1,516) 590 (9,084) 370 1,808 2,048 2,290 6,515

Income tax (benefit) 387 632 (321) 164 862 43 (389) (252) 153 (445) 96 470 532 595 1,694

Net income 1,512 1,751 627 (191) 3,699 (189) (7,623) (1,264) 437 (8,640) 274 1,338 1,515 1,695 4,821

EPS 0.15 0.18 0.06 (0.02) 0.37 (0.02) (0.78) (0.13) 0.04 (0.88) 0.03 0.14 0.15 0.17 0.49

Shares Outstanding 9,912 9,917 9,919 9,887 9,909 9,779 9,779 9,779 9,780 9,779 9,780 9,780 9,780 9,780 9,780

Margin Analysis

Gross margin 23.4% 24.5% 20.3% 20.5% 22.5% 21.0% 21.1% 18.6% 23.0% 20.9% 23.3% 23.5% 23.8% 24.0% 23.6%

SG&A 16.8% 16.1% 17.2% 18.1% 17.0% 18.4% 19.1% 17.0% 17.1% 17.9% 16.8% 16.5% 16.3% 16.1% 16.4%

Operating margin 5.6% 7.2% 2.7% 3.3% 4.8% 2.4% (17.2)% (0.9)% 4.6% (2.8)% 3.5% 7.0% 7.4% 7.9% 6.5%

Tax rate 20.4% 26.5% NMF NMF 18.9% NMF NMF NMF 26.0% 4.9% 26.0% 26.0% 26.0% 26.0% 26.0%

Net margin 3.2% 3.8% 1.5% (0.5)% 2.1% (0.5)% (19.6)% (3.3)% 1.1% (5.6)% 0.7% 3.3% 3.7% 4.1% 3.0%

Year / Year Growth

Total Revenues (1.2)% 2.7% 2.0% (4.5)% (0.2)% (16.6)% (15.0)% (8.3)% (4.6)% (11.4)% 1.4% 4.1% 6.4% 9.2% 5.2%


Quarterly Income Statement 2018A to 2020E (in thousands $)



13

Statement of Cash Flows for the Periods Ended

(in thousands $)

FY16A FY17A FY18A 9M19A FY19E FY20E

Net income (loss) 6,684 6,487 3,699 (9,077) (8,640) 4,821

Impairment of goodwill - - - 6,760 6,760

Inventory allowance - - - 1,742 1,742

Depreciation and amortization 5,502 6,320 6,630 5,140 6,853 6,780

Amortization of debt issuance costs 128 149 147 133 177 177

(Gain) loss on sale of assets (127) 63 (138) 5 5 -

Loss on extinguishment of debt 60 - 59 - - -

Bad debt adjustment (274) 128 13 191 191 -

Loss (gain) on derivative instruments 22 (228) 452 746 746 -

Stock option expense 166 150 131 117 156 156

Deferred taxes (1,166) (1,552) (291) (1,073) (2,929) (119)

Cash earnings (loss) 10,995 11,517 10,702 4,684 5,061 11,815

Changes in assets and liabilities

Accounts receivable (3,987) (444) (3,641) 2,787 3,526 (1,427)

Inventory 340 402 45 11 1,573 (241)

Prepaid expenses and other assets (1,292) (1,766) 1,212 (646) (1,560) (58)

Accounts payable 1,330 (1,706) 1,008 337 1,123 206

Accrued and other liabilities 375 (194) 104 (259) (518) -

(Increase) decrease in working capital (3,234) (3,708) (1,272) 2,230 4,144 (1,520)

Net cash provided by (used in) operations 7,761 7,809 9,430 6,914 9,206 10,296

Purchase of property and equipment (3,362) (4,140) (5,394) (2,130) (2,130) (2,500)

Proceeds from sale of property and equipment 2,187 52 904 42 42 -

Acquisition of Intasco (21,031) - - - - -

Working capital adjustment related to Intasco 213 - - - - -

Net cash provided by (used in) investing (21,993) (4,088) (4,490) (2,088) (2,088) (2,500)

Net change in bank overdraft 549 (38) (1,251) 1,003 1,003 -

Proceeds from debt 32,000 - 10,132 1,300 1,300 -

Payments on term loans (2,444) (3,375) (2,962) (3,012) (4,167) (3,960)

Proceeds from (payments on) revolving facilities 5,690 6,231 (4,422) (3,510) (4,693) (4,670)

Debt issuance costs (514) - (634) - - -

Pay-off of old senior credit facility (15,375) - - - - -

Proceeds from exercise of stock options and warrants 116 37 38 - 40 40

Distribution of cash dividends (5,812) (5,850) (5,862) (489) (489) -

Net cash provided by (used in) financing 14,210 (2,995) (4,961) (4,708) (7,006) (8,590)

Net change in cash (21) 725 (21) 117 112 (794)

Cash - beginning of period 727 706 1,431 1,410 1,410 1,522

Cash - end of period 706 1,431 1,410 1,527 1,522 727



14

Price Chart

Taglich Brothers’ Current Ratings Distribution

Investment Banking Services for Companies Covered in the Past 12 Months

Rating # %

Buy 2 10Hold

Sell

Not Rated 1 25



15

Important Disclosures

As of the date of this report, Taglich Brothers, Inc. and/or its affiliates, own more than 1% of UFAB

common stock. Michael Taglich, President of Taglich Brothers, Inc., owns or has a controlling interest

in 476,467 shares of UFAB common stock and 10,587 warrants. Robert Taglich, Managing Director of

Taglich Brothers, Inc., owns or has a controlling interest in 494,694 shares of UFAB common stock and

8,663 warrants. Doug Hailey, Managing Director – Investment Banking at Taglich Brothers, Inc. owns

or has a controlling interest in 24,821 shares of UFAB common stock and 7,050 warrants. William

Cook, Vice President – Investment Banking at Taglich Brothers, Inc. and a Director at Unique

Fabricating, owns or has a controlling interest in 45,142 shares of UFAB common stock and 6,000

shares subject to exercisable options. Robert Schroeder, Vice President – Investment Banking at

Taglich Brothers, Inc. owns or has a controlling interest in 10,353 shares of UFAB common stock and

14,100 warrants. Richard Oh, Managing Director at Taglich Brothers, Inc. owns or has a controlling

interest in 51,600 shares of UFAB common stock and 3,700 warrants. Other employees at Taglich

Brothers, Inc. own or have controlling interests in 6,650 shares of UFAB common stock and 23,100

warrants. Taglich Brothers, Inc. had an investment banking relationship with the company mentioned in

this report. In March 2013, Taglich Brothers, Inc. arranged the equity financing for the Management

Buyout of Unique Fabricating, Inc. In December 2013, Taglich Brothers, Inc. arranged the equity

financing for UFAB’s acquisition of Prescotech Industries, Inc. In July 2015, Taglich Brothers, Inc.

served as the Joint Book Running Manager in the Initial Public Offering of common stock for the

company.

All research issued by Taglich Brothers, Inc. is based on public information. Unique Fabricating, Inc.

does not pay Taglich Brothers, Inc. for the creation and dissemination of research reports.

General Disclosures

The information and statistical data contained herein have been obtained from sources, which we believe

to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to

advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell.

Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and

does not sell to or buy from customers on a principal basis. The above statement is the opinion of

Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met or that

predicted business results for the company will occur. There may be instances when fundamental,

technical and quantitative opinions contained in this report are not in concert. We, our affiliates, any

officer, director or stockholder or any member of their families may from time to time purchase or sell

any of the above-mentioned or related securities. Analysts and members of the Research Department are

prohibited from buying or selling securities issued by the companies that Taglich Brothers, Inc. has a

research relationship with, except if ownership of such securities was prior to the start of such

relationship, then an Analyst or member of the Research Department may sell such securities after

obtaining expressed written permission from Compliance.

Analyst Certification

I, John Nobile, the research analyst of this report, hereby certify that the views expressed in this report

accurately reflect my personal views about the subject securities and issuers; and that no part of my

compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views

contained in this report.



16

Public companies mentioned in this report:

Fox Factory Holding (NASDAQ: FOXF)

Gentherm (NASDAQ: THRM)

Horizon Global (NYSE: HZN)

Modine Manufacturing (NYSE: MOD)

Motorcar Parts of America (NASDAQ: MPAA)

Standard Motor Products (NYSE: SMP)

Stoneridge (NYSE: SRI)

Strattec Security (NASDAQ: STRT)

Superior Industries International (NYSE: SUP)

Tower International (NASDAQ: TOWR)

Meaning of Ratings

Buy – The growth prospects, degree of investment risk, and valuation make the stock attractive relative to the

general market or comparable stocks.

Speculative Buy – Long term prospects of the company are promising but investment risk is significantly higher

than it is in our BUY-rated stocks. Risk-reward considerations justify purchase mainly by high risk-tolerant

accounts. In the short run, the stock may be subject to high volatility and could continue to trade at a discount to

its market.

Neutral – Based on our outlook the stock is adequately valued. If investment risks are within acceptable

parameters, this equity could remain a holding if already owned.

Sell – Based on our outlook the stock is significantly overvalued. A weak company or sector outlook and a high

degree of investment risk make it likely that the stock will underperform relative to the general market.

Dropping Coverage – Research coverage discontinued due to the acquisition of the company, termination of

research services, non-payment for such services, diminished investor interest, or departure of the analyst.

Some notable Risks within the Microcap Market

Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue

Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to

their peers. The most common of these risks is liquidity risk, which is typically caused by small trading

floats and very low trading volume which can lead to large spreads and high volatility in stock price. In

addition, Microcaps tend to have significant company specific risks that contribute to lower valuations.

Investors need to be aware of the higher probability of financial default and higher degree of financial

distress inherent in the microcap segment of the market.

From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish

informational reports on such companies; however, they have no ratings or price targets. In general, we will not

rate any company that has too much business or financial uncertainty for our analysts to form an investment

conclusion, or that is currently in the process of being acquired.

research report updatetaglich.com/companyreports/unique_fabricating/unique... · 2019. 11. 25. ·...

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